The International Monetary Fund has effectively branded Britain a tax haven. The world's most important financial organisation last week published a working paper seeking a definition of offshore financial centres. For the very first time it ranked Britain alongside the likes of Bermuda and the Cayman Islands - unregulated jurisdictions associated with illicit funds.

Britain is included in the IMF study because it plays a huge role in supplying financial services to 'non-domiciles'. For that, read the super-rich.

The IMF has now recognised what everyone else has known for sometime: London has become home to the wealthiest people on the planet because it allows them to part with relatively little cash while they live here.

'Indian steel magnate Lakshmi Mittal and Russian oligarch Roman Abramovich do not reside in the capital for the theatre and abundant restaurants,' said one prominent tax adviser. 'They are here for one reason: non-domicile tax status.'

This is the legal loophole that ensures you do not have to pay tax in Britain on money earned from abroad. For Labour, the super-rich provide an adrenalin shot to the economy, ensuring the Square Mile is the world's most important international financial centre, which in turn allows the capital to subsidise the rest of the UK.

To critics, letting the super-rich pay a tiny fraction of their earnings in tax undermines faith in the political system and encourages capital flight from developing countries. For British-born tycoons, there are alternative legal ways of reducing tax, whether through offshore trusts or non-resident status.

As the gap between rich and poor widens under Labour, the issue of non-doms is rising sharply up the political agenda. In opposition, Labour said it would scrap the rule and the Chancellor said that he would review non-dom tax status. Over 10 years little has emerged.

But this week the Liberal Democrat shadow Chancellor, Vince Cable, will demand answers. Cable will demand details about the nature of the government's review, how many people are working on it, when it will conclude and what it has so far uncovered.

The questions will be severely embarrassing to Brown, who has refused to detail any information about how much tax is sacrificed because of the laws.

Last year there was a hint. Accountant Grant Thornton calculated that the UK's 54 billionaires paid income tax totalling just £14.7m on their £126bn combined fortunes, and only a handful paid any capital gains tax.

The Treasury points out that last week it launched a crackdown on tax evaders by announcing a partial amnesty for hundreds of thousands of them. It expects the move bring in at least £1bn. Critics suggest this is a drop in the ocean while non-dom tax rules stay in place.

The non-dom rule, which dates back to 1799 when income tax was first levied here, can also apply to UK individuals. For instance, Formula One tycoon Bernie Ecclestone has benefited from the loophole though shares given to his wife.

One adviser to private equity companies and hedge funds described as routine the situation in which financiers who made substantial cash were automatically forwarded forms to apply for non-dom status from their secretaries. 'Tax avoidance is institutionalised in the city.'

Peter Mandelson, then a cabinet minister and now an EU commissioner, set the tone in 1998. He said Labour was 'intensely relaxed' about people getting filthy rich, but added a crucial qualification - as long as they paid taxes.

Somehow the last part seems to have been forgotten. Richard Murphy, one of Britain's most knowledgeable experts on tax, said: 'When I have sat with Treasury officials and asked them why don't they do something about this, it is because they are frightened the money will leave London and they think there is a benefit to this. We say quantify the benefit.'

Offshore tax havens were legitimised after the Second World War. But it was Margaret Thatcher who was the architect of London's status as a financial centre. The lifting of capital exchange controls and the Big Bang in the City liberated capital. Labour has never dared to interfere with this process.

John Christensen, director of Tax Justice International, was a former economic adviser to the Jersey government - one of the most important tax havens - and now campaigns for tax reform. 'I saw, at first hand, how people use offshore structures for market-rigging, insider trading, paying kickbacks, bribing, and other corrupt practices,' he said. 'One day when I raised concerns about a client account being used to shift money illegally out of Africa, the account supervisor told me that she wasn't interested in discussing such matters and didn't "give a shit about Africa anyway".'

The City of London is the world's largest tax haven, attracting super-rich people from across the globe. Not all accumulated their wealth honestly. There are no figures on how much they contribute to the UK economy - although they do contribute to inflated property prices. The UK has become a centre for illicit funds drained from many of the world's poorer countries, and British offshore secrecy prevents those countries from running effective tax regimes. These sums massively exceed the value of Britain's foreign aid contributions. By importing this money, we export corruption, poverty and political instability.

This week, Brown will be forced to defend himself against these charges in the Commons.

Pay less - legally

Non-domicile tax laws were formed in 1799 when income tax was first imposed, to allow colonialists who owned land in the UK to escape paying tax on earnings they made overseas.

Today the rule allows some of the country's richest people to avoid tax on all their income and capital gains in the rest of the world, providing they do not bring the money into Britain.

This has led to the creation of intricate offshore 'vehicles' . It is these vehicles that buy huge houses here.

There are other legal ways of minimising tax bills. British born tycoon Sir Richard Branson holds much of his wealth in offshore tax havens while Sir Philip Green's wife, Tina, owns a large chunk of his assets. She is non-resident.

'Let us now praise wealthy men and women.' It would not work as the theme for a Sunday sermon. Our economy has, however, benefited hugely from wealthy foreigners taking advantage of our non-domicile tax regime. The benefits are threefold.

First, billionaires spend money here, injecting wealth into our economy. Directly, they spend liberally and, as wealthy people, they demand the best. Thus they help to improve our skills base in such areas as construction, catering, health, education, art and entertainment. Indirectly, their wealth 'trickles down' through the economy as the people they employ spend the money they have just earned.

Second, our liberal tax laws concentrate global business decision-makers in London. This means huge business deals, wherever the assets may be located, take place here and are executed by London lawyers, accountants and bankers under UK commercial law. Once again, our global competitiveness is enhanced.

Third, there is a cluster effect. One billionaire's arrival from one part of the world has typically led to the arrival of others, making the UK home to tens of thousands of rich people from the Middle East, Russia and Asia. Just as the cluster effect has made Silicon Valley the leading centre of technology innovation, so the cluster effect has helped consolidate the City's position as the global centre of financial innovation.

Some might say foreigners drain our resources, but billionaires pay top dollar for services that most people receive for free, such as health and education. Critics might also say they inflate house prices beyond the reach of natives in London's hotspots. However, the lack of affordable private-sector housing results from planning constraints and the English distaste for high-rise living, not an influx of billionaires.

So far, Gordon Brown has resisted pressure from socialist backbenchers to end the non-domicile rules for fear that wealthy foreigners will disappear to other low-tax regimes. In doing so, he has contributed hugely to UK economic vibrancy and helped to generate funds for higher health and education spending. When he moves next door to Number 10 this summer, he should insist his successor also sits on his hands.